Dan Hirsch, President of Alliance Game Distributors, LLC announced Friday, March 30 that Alliance is acquiring the businesses of three California distributors of pop culture products -- Berkeley Top Line Distributors (BTL), its sister company Sports Memories Inc.(SMI), and Barchetta Distribution. The BTL and SMI deals have closed; the Barchetta deal is expected to close within thirty days. In the BTL and SMI deals, Alliance is acquiring 'the majority of the assets and liabilities;' in the Barchetta deal, 'selected assets' are being acquired.
The Berkeley and Barchetta businesses will be integrated into Alliance, which will continue to be managed by the current Alliance management team. Topline and Sports Memories will be operated separately under the management of Ed Wentland, President of BTL and SMI. For Berkeley there is a 'back to the future' quality about this acquisition since Berkeley was once allied with Chessex, the ancestor of the current Alliance, until Chessex sold Berkeley to Mike Sloan. Subsequently Berkeley merged with Top Line to become the current Berkeley Top Line Distributing. (For the complete Alliance press release, see 'Berkeley and Berchetta Join Forces with Alliance.')
For retailers, disruption from the effects of the Berkeley/Alliance merger should be minimal. Retailers who dealt with Berkeley and Barchetta will receive the same discount and payment terms with Alliance, though their discounts will be reconfigured in accordance with Alliance discount schedule after 90 days. Alliance will retain Berkeley and Barchetta's sales offices to preserve the customers' points of interaction with the company, while consolidating all acquired warehouse operations into Alliance warehouses in Visalia, California and Fort Wayne, Indiana. It's also likely that many Berkeley and Barchetta customers already dealt with Alliance as a primary or secondary supplier and so are familiar with the company's ways of doing business. So although there are still plenty of other full line game distributors, most BTL and Barchetta customers will probably continue to buy from Alliance. (For the complete Alliance/BTL retailer q & a, see 'Alliance Acquisition Questions and Answers.')
The Acquisition Strategy
In the announcement and retailer q & a, Hirsch said that the 'acquisition is intended to combine the relationships and experience in West Coast operations of BTL with the technology, logistics, and game focus of Alliance,' and that Alliance 'marketing support' would also be a factor. Although there are balance sheet items in the acquisition, this basically represents an acquisition of the Berkeley-Top Line and Barchetta customers by Alliance, which can service them largely on its existing infrastructure, especially in the areas mentioned in the announcement -- technology, logistics, and marketing.
A good example of how this works is the distributor catalogue. Alliance publishes a substantial monthly catalogue -- Game Trade Magazine -- using a significant number of person-hours by merchandisers, writers, production people, and so on. That catalogue is then printed for whatever the number of retailers that get it. Increasing the number of retailers served by that catalogue creates at least three significant economies of scale. First, printing more copies only changes the printing cost; all of the people and technology costs of communicating with suppliers, creating the listings, processing graphics, design, laying out the publication, and producing a digital file or film from which to print are fixed, substantially lowering the cost of each copy distributed. Second, the actual cost per copy printed drops with higher volume.Third, advertising revenue from the larger print run can increase, as more buyers are delivered to ad customers. The people that produced the catalogue for the acquired companies can be downsized, absorbed into other functions, or potentially used to expand marketing services in some way to improve competitive positioning beyond what it had been before.
The consolidation of Alliance and the two latest acquisitions also has the additional turbo-charging factor of ownership by Steve Geppi, who also owns Diamond Comic Distributors, Inc. All the companies in the group owned by Geppi, which now includes game, trading card, and comic distribution companies can achieve economies of scale from the combined volume in such areas as marketing, technology, and logistics. And the Diamond management team is a group of grizzled acquisition veterans who have dealt with the same integration issues many times before and have developed successful ways of dealing with them (for a discussion of some of the ways Diamond has successfully integrated acquisitions in the past, see '20 Questions: Chuck Parker').
The move into parallel categories is part of an over-all strategy by the Diamond group. As Diamond CFO Larry Swanson put it in an interview with ICv2 a couple of months ago (see '20 Questions: Larry Swanson'), 'We're sizable in our existing core markets already. Therefore, we've begun to strategically look at other product lines, and who within those lines we may identify as a good business partner. ...So that's how we're focused now. It's all aimed at keeping a base of volume within the family of companies and giving us the opportunity to expand. The joint efforts of Diamond and Alliance will grow our presence in the gaming industry beyond just what Alliance is today.' He also indicated that a move into other categories just generally '...makes sense' for Diamond.
The Game Distribution Picture
ICv2 has obtained some approximate distributor market share numbers from several game companies. Based on the information we obtained, we believe that Alliance had a 40-45% share of the game store/comic store channel of the game market prior to the acquisitions, Berkeley around 10%, Diamond in the high single digits and Barchetta in the low single digits. That puts the combined group market share of the Diamond/Alliance group after these acquisitions at 60% or more. It's worth noting that one smaller company told us that Alliance was only around 12% of its volume. This seemed tied to the number of different distributors to which the company sold (some larger game companies sell to under ten distributors) and which distributors were growing fastest with the line. But given the over-all nature of the numbers we received, with some rough weighting for the size of the manufacturers involved, we believe the 60% share figure for the combined entity to be a conservative estimate. Wargames West is reported to be the only remaining independent distributor with a double digit share (around 15%). The remaining volume is divided between a number of smaller companies with single digit shares.
Other game distributors contacted by ICv2 are concerned about Alliance's recent acquisitions (none spoke for attribution). They are particularly worried that the Alliance/Berkeley/Diamond group will be able to use its large market share to induce manufacturers to create exclusive products that would be unavailable to other distributors. So far the Games Workshop tabletop boardgame for Lord of the Rings is the only example of an Alliance/Diamond game exclusive (see 'Alliance, Diamond Have LOTR Exclusive'), although Alliance also can sell Diamond's toy exclusives, which are unavailable through other distributors. Other competitive threats to the smaller distributors are the higher level catalogues and other marketing that can be supported by a larger organization. This was a factor for one of the acquired companies as well. An unidentified Berchetta spokesperson told us that one of the reasons for the sale of the company was the difficulty of competing with the catalogue and other strong marketing of Alliance.
